When most people think of getting a mortgage loan, they tend to think about requesting a fixed rate mortgage. In fact, any time you see the word ‘mortgage’, it is usually referring specifically to a fixed rate mortgage. Their is another option though — an adjustable rate mortgage (ARM). The most common type of adjustable mortgages are those with an initial period of three, five and seven years that has a “2/1” interest rate adjustment period – meaning every two years after the initial adjustment period is over. The mortgage loan that adjusts annually is referred to as an Adjustable Rate Mortgage (ARM) or Adjustable Interest Mortgage (AM).

There are many different types of mortgage loans, but they can be divided into two main categories: fixed-rate and adjustable-rate. Fixed-rate loans stay at a fixed interest rate throughout the life of the loan, while adjustable-rate mortgages can change their interest rates based on market conditions.

There are also subcategories within each type. For example, there are 30-year fixed-rate mortgages (FRMs) and 15-year FRMs. And the terms for adjustable-rates may vary based on what’s called “indexes” (such as LIBOR or Treasury rates), whether or not it has an introductory rate for a set period of time, what type of payment option you choose (biweekly/monthly), and whether or not your interest rate can change based on an index change.

What is a mortgage?

A mortgage is an agreement between you and a lender that gives the lender the right to take your property if you fail to repay the money you’ve borrowed plus interest.

Mortgage loans are used to buy a home or to borrow money against the value of a home you already own.

Seven things to look for in a mortgage

The size of the loan
The interest rate and any associated points
The closing costs of the loan, including the lender’s fees
The Annual Percentage Rate (APR)
The type of interest rate and whether it can change (is it fixed or adjustable?)
The loan term, or how long you have to repay the loan
Whether the loan has other risky features, such as a pre-payment penalty, a balloon clause, an interest-only feature, or negative amortization

Focus on a mortgage that is affordable for you given your other priorities, not on how much you qualify for.

Lenders will tell you how much you are qualified to borrow – that is, how much they are willing to lend you. Several online calculators will compare your income and debts and come up with similar answers. But how much you could borrow is very different from how much you can afford to repay without stretching your budget for other important items too thin. Lenders do not take into account all your family and financial circumstances. To know how much you can afford to repay, you’ll need to take a hard look at your family’s income, expenses and savings priorities to see what fits comfortably within your budget.

Don’t forget other costs when coming up with your ideal payment.

Costs such as homeowner’s insurance, property taxes, and private mortgage insurance are typically added to your monthly mortgage payment, so be sure to include these costs when calculating how much you can afford. You can get estimates from your local tax assessor, insurance agent and lender. Knowing how much you can comfortably pay each month will also help you estimate a reasonable price range for your new home.

Which Type of Mortgage Is Right for You?

First off, there are a lot of factors that go into choosing the right type of mortgage — and surprisingly, some of them have nothing to do with money.

“In order to determine what mortgage type is right for you, focus first on the non-financial aspects of the purchase,” said Gregory Giardino, a financial advisor with J.M. Franklin & Company LLC, a retirement planning financial firm.

Here are some questions you should be asking yourself:

How long do you plan to live there? Knowing how long you expect to stay in a certain city is important in determining what type of loan to get and how much. “Having an estimate of how long you anticipate staying in your home is critical in determining how to maximize loan terms to your advantage,” Giardino said.
What are your prospects for job/career security? Is your industry growing or at least stable? “The last thing you want to do is pick the wrong mortgage type because you assumed your industry was immune to change,” Giardino said.
What is your future earning potential? Do you expect your pay to increase, stay the same, or even decrease? “Your profession’s growth and the earnings potential of your paycheck will influence in the long-term what type of loan is appropriate for your family,” Giardino said.

Once you answer those questions honestly and openly, you can now consider the loan terms and interest rates that are most beneficial to you.

Different Types of Loans

Conventional Mortgage Loan and Jumbo Loans

A conventional loan is the most common type of mortgage, and refers to any mortgage not backed by a government agency. There’s a reason why most buyers end up with conventional loans: Conventional loans have strict lending requirements from banks, so they come with fewer limitations when it comes to income and property type, and they tend to carry lower fees.

“Lenders know them, and they’re pretty competitive,” said Matt Bacon, an investment advisor at Carmichael Hill, a financial advisory firm. “This is like the bread and butter for everything.”

Conventional loans will work for most purchases. Usually, if you put down less than a 20% downpayment, you’ll have to pay private mortgage insurance, which can cost a few hundred dollars a month.

Be aware of the two types of conventional loans: conforming or jumbo. There is an upper limit on the purchase price before a mortgage becomes a “jumbo loan,” which has higher interest rates and stricter requirements. You can use this map to see what the conforming loan limits are in your area.

Fixed Rate Loan vs Adjustable Rate Loan

Mortgages are available with two different types of interest rates: fixed and adjustable.

On a fixed-rate loan, the interest rate stays the same for the entire life in the loan. That means you lock in the interest rate of today’s market for the next 15-30 years.
On an adjustable-rate loan, the interest rate varies along with the broader financial market. It’s likely to go up and down over the course of the loan, which could cause big swings in your mortgage payments.

An adjustable-rate mortgage might get you a lower interest rate upfront, but you have to be prepared for that to go up over time. But if you plan to stay in this home for many years, you’ll likely want to lock in a fixed rate now.

Government-Insured Loan

There are a number of government-insured loans that can make homebuying more accessible. You may have heard of VA, USDA or FHA loans, all of which make it easier for some borrowers to qualify for and afford a mortgage.

Depending on your financial situation, a conventional loan isn’t necessarily better than a government-backed loan, Bacon said. Either might work for your income level and housing goals. Certain non-conventional loans carry specific benefits, like the VA loan’s favorable terms for veterans or the USDA’s incentives to buy in rural areas.

Government-backed loans are issued by many of the same lenders who issue conventional loans. Some financial advisors warn that government-issued loans might be less appealing to sellers in today’s hot housing market where cash offers and conventional loans are seen as the most desirable, Bacon said.

Other Types of Mortgages

There are a few other types of mortgages that are less popular, but still available to buyers:

Interest-only mortgages: This type of loan allows you to pay only interest during a set period of time, after which you need to refinance the loan or start paying higher monthly payments.
Combination mortgage: Also known as a “piggyback” loan, this allows borrowers to combine two loans and qualify for a higher loan amount.
Reverse mortgages: Available to homeowners who are 62 and older, this type of loan allows you to borrow against the value of your home without having to make monthly payments.

The right type of mortgage is a decision that will stay with you (and your wallet) for a very long time. Start by understanding your needs (what you can afford, and how long you plan to stay in the home) and then choose the loan that fits you best. Make sure to shop around with different lenders to get the lowest mortgage rates possible. Experts recommend requesting and comparing at least three different quotes before deciding on a lender.

Equitable mortgage

A mortgage under which the mortgagee does not obtain a legal interest in the land. An equitable mortgage may arise as follows:(1) If the mortgagor has only an equitable interest in the land, he can only grant an equitable mortgage. For example, a mortgage granted by a beneficiary under a trust of land could only be equitable.(2) An equitable mortgage will arise if the mortgage is not made by deed (a requirement for legal mortgages). The contract for the mortgage must nevertheless be made in writing.(3) If a charge by way of legal mortgage of registered land is not entered onto the register, it takes effect in equity only (Land Registration Act 2002 s 27(1).

(1) If the mortgagor has only an equitable interest in the land, he can only grant an equitable mortgage. For example, a mortgage granted by a beneficiary under a trust of land could only be equitable.

(2) An equitable mortgage will arise if the mortgage is not made by deed (a requirement for legal mortgages). The contract for the mortgage must nevertheless be made in writing.

(3) If a charge by way of legal mortgage of registered land is not entered onto the register, it takes effect in equity only (Land Registration Act 2002 s 27(1).

How many different types of mortgage loans are there